For all the negative headlines, we’re still picking this market to go higher.
Sure, some parts of the world economy don’t look great right now.
But will it really make a difference to the seemingly inevitable growth path of China’s economy over the next five or six years?
And what about the impact on US stocks? US stocks are near an all-time high. But if a report from Bloomberg is right, even at this level stocks are still cheap when compared to the 1990s bull market.
So cheap in fact, that ‘huge gains’ may still lie ahead…
But before we explain where these gains could come from, isn’t there a chance that your editor has ‘confirmation bias’?
In other words, that we’ve become so convinced that the market is going higher, that all we can see are news stories confirming that view.
As an investor that’s something you should always consider. Looking back on yesterday’s Money Morning, that’s another reason why it’s helpful that we publish opposing views.
It should serve to make sure that when the next stock market crash arrives it doesn’t take you by surprise. We can only pity the poor saps who only feed on the ‘single view’ analysis from the mainstream.
But just because your editor has a high conviction view of where the market is going over the next five years, don’t assume that we have a distorted view of the market. Maybe the reason we see a bright future for stocks isn’t because of confirmation bias, but because things are looking pretty good.
We see Value Because There is Value
Put it this way. Nearly two years ago we upgraded our car.
We bought a Subaru Forrester.
Until that time we can’t say that we had ever knowingly seen one on the road.
But after buying the car it seemed as though every second car was a Forrester.
It’s funny how that happens. One day we barely knew a model of car existed, the next we can’t drive for more than a minute without seeing one.
Was that just a kind of confirmation bias? Were we just seeing something because we were looking for it?
It turns out that the Forrester is one of the most popular small SUV’s on the Aussie market. The reason we started seeing a lot of them is, well, there are a lot of them on the road.
In the same vein, the reason we feel as though we can see a lot of good value stocks on the market is because there are a lot of good value stocks on the market.
Take this report from Bloomberg:
‘While the S&P 500′s multiple of 17 times reported earnings is close to the average since 1937, it’s about 40 percent below where it was in 2000, data compiled by Bloomberg and S&P show.
‘The lower valuation reflects faster earnings expansion. Profits for S&P 500 companies have climbed an average 21 percent a quarter since 2009, almost double the growth rate during the dot-com boom, according to data complied by S&P.’
Most investors agree that the dot-com boom was one of the biggest stock bubbles in history. And yet according to S&P, stock values today are 40% below the 2000 peak valuation levels.
What does that do for the idea that stocks are in a bubble? At the least it casts doubt on the idea.
Chance for Investors to Buy Beaten Down Stocks
The fact is if you take the trouble to look for good value you can find it.
Take the ‘terminally ill’ iconic Aussie media stock that we tipped in Australian Small-Cap Investigator in November 2012. As of today that ‘ill’ stock is up 143%.
Jason Stevenson continues to find beaten down resource stocks on the Aussie market. Jason’s head for numbers means he can take apart any balance sheet you put before him. His task is to figure out which mining stocks have real potential, and which are licences to lose money.
Or take the biotech stock Sam Volkering uncovered for Revolutionary Tech Investor subscribers last July. It’s now up 453%, with further gains to come. Sam says he’ll have more details on the latest opportunities available to investors later this week.
And unlike the 1990s, when tech stocks went mental, this time the gains have been far more realistic. Investors have spread their money around the market rather than focusing on one sector.
As Bloomberg reports:
‘Health-care ETFs drew $4.6 billion, almost half of the $10 billion that sector-focused funds added through March 6, data compiled by Bloomberg show. Real estate and energy funds got $3.1 billion and $2.5 billion, respectively. Technology ETFs absorbed $1.5 billion while those investing in consumer-discretionary companies saw the biggest withdrawals among 12 sectors tracked by Bloomberg, with outflows totaling $2.2 billion.’
Got that? Only 15% of ETF inflows have gone towards tech stocks. That’s another good sign. It means that investors haven’t just bought high-risk stocks, looking for outlandish gains.
This says to us that the current market is a long way from a bubble or a market top. Analyst E William Stone from PNC Wealth Management in Philadelphia says he sees the market making ‘huge gains’ from the 2009 bottom.
Investor sentiment isn’t always an accurate guide. But the skittish behaviour of investors over the past year should be proof that investors still have a negative view of the market.
That means there are still opportunities for savvy investors to take advantage of this and buy stocks that are trading for knockdown valuations.
Cheers,
Kris
